An analyst has made the following return projections for each of three possible outcomes with an equal likelihood of occurrence:
Asset | Outcome 1 (%) |
Outcome 2 (%) |
Outcome 3 (%) |
Expected Return (%) |
1 | 12 | 0 | 6 | 6 |
2 | 12 | 6 | 0 | 6 |
3 | 0 | 6 | 12 | 6 |
Question
Q. If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets provides the least amount of risk reduction?
- Asset 1 and Asset 2.
- Asset 1 and Asset 3.
- Asset 2 and Asset 3.
OPTION 1
because they are positively correlated to each other.
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